Joint Trusts - A Great Planning Opportunity for Non-Traditional Couples and Blended Families

Creating an estate plan for clients who are in non-traditional relationships or are part of a blended family can be very tricky.
  

Why is Estate Planning for Non-Traditional Couples So Tricky?

Let's assume a hypothetical fact situation where you have a women (Jane) with $4M in assets.  She is a widow and has 2 children.  Now let's also assume that she is in a committed relationship with a person (Alex) who has $2M in assets, and Alex has three children.  Finally, let's assume that they agreed to set up a joint bank account and that they want to buy a house together worth about $1M, with Jane putting up three-quarters of the money for the house.  

Typically, the clients in this scenario will want to take care of each other, but they also want to ensure that a certain amount of their assets go to their respective children.  Let's assume the specific goal for Jane and Alex is that the surviving partner can have the joint bank account and use the house for the rest of their life, but everything else goes to their respective children.  To accomplish this, they buy the house as joint tenants with rights of survivorship and create Wills leaving everything else to their respective children.

In this hypothetical, if Jane dies first, the house and the joint bank account go to Alex because they are joint assets and supersede the Will.  When Alex dies, his $2M plus the house goes to his children.  This is not necessarily a far result for Jane's children.  Alternatively, if Alex dies first, the house and the bank account goes to Jane, and then upon her death, it all goes to her children, cutting out Alex's descendants with respect to the joint assets.  As you can see, the problem with this traditional plan is that one partner dies and the survivor takes the house and bank account and it cuts out the descendants of the first client to die with respect to the joint assets.

Why a Joint Trust Can Be an Important Estate Planning Tool for Non-Traditional Couples

One of the best ways to handle a situation like this is for Jane and Alex to set up a joint trust.  The trust could be funded with the house and cash (in whatever amount they like).  While Jane and Alex are alive, the trust could be revocable and they could have complete control over it to do whatever they like.  The trust becomes really powerful when the first partner dies (or becomes incapacitated), because we can then make the trust Irrevocable.  While we can customize these types of trusts in many ways, most people want to guarantee that the survivor can: live in the house for the rest of their lifetime, sell it and buy other real estate, or sell it and have an income stream to live off of.  

The main benefit to this type of trust planning is that we can provide a much safer way of ensuring that ALL of Jane and Alex's descendants receive whatever is left over when the survivor dies.  Moreover, we can make sure that their descendants receive money in a way that is more fair based upon need or based upon how Jane and Alex contributed funds towards the trust.  In this example, since Jane is putting up $750,000 towards the house, the trust can say that, following the deaths of both Jane and Alex, the remainder of the trust assets go 3/4 to Jane's children and 1/4 to Alex's children.  

Initially, Jane and Alex could be in control of the Trust (making them the Trustees).  We can also have a system in place so that one of Jane's children steps up as co-trustee if something happens to Jane and one of Alex's children steps up as co-trustee if something happens to Alex.  If Jane's children and Alex's children can't work together, we can also have a neutral trustee appointed. 

Can Anyone Create a Joint Trust?

Anyone can create a joint trust.  The type of trust I am describing in this post works for unmarried or married couples. 

Are There Any Downsides to Creating a Joint Trust?

When creating any estate plan, one of the downsides is the cost to create the plan.  Creating a custom plan like this will certainly cost more than simply titling assets in joint name.  However, the more money over which you are trying to control the disposition, the more it is worth setting up this type of trust.

Another potential downside to creating a joint trust is that, depending upon its structure, the trust may need a tax identification number and a tax return will need to be filed for the trust for any income earned.  

It should also be pointed out though that if the couple is unmarried and they live in a jurisdiction with an inheritance tax (like New Jersey or Pennsylvania), this structure would trigger the inheritance tax on both the first to die and likely the second to die.  However, for unmarried couples, this tax would be incurred on the first to die regardless of whether or not a joint trust was utilized.  In New Jersey, the inheritance tax could be avoided if the couple agrees to enter into a NJ Domestic Partnership agreement.

How Do I Create a Joint Trust?

If you would like to know more about estate planning for non-traditional couples or setting up a joint trust, we would happy to speak with you to so that it could be properly customized to meet your needs.  Kevin A. Pollock, Esq., LL.M. is an attorney licensed to practice in NJ, NY, PA and FL.  Kevin Pollock meets with clients in Lawrenceville, NJ and in Boca Raton, FL by appointment only.  Kevin may be reached at (609) 818-1555.  

Pass-Through Business Alternative Income Tax Act

New Jersey may be getting a lot tax friendlier for small business owners.  I hesitate to even write this blog post, as I generally prefer to wait until legislation is actually passed before I write on a topic (mainly because it is a waste of everyone's time to read about something that may never come into law).  However, the NJ State Senate has already passed the "Pass-Through Business Alternative Income Tax Act" by vote of 40-0, so there's a good chance that this may become law, and very soon.

Here's the gist of how the new law is supposed to work:
1)  NJ will start implementing a new business tax, effective January 1, 2018, on pass through business entities (such as limited liability companies, S-Corporations, and Partnerships).
2) This new business tax will be roughly equal to the tax the owners of the business are already paying on their NJ income tax returns.
3) The owners of the business will receive a dollar for dollar credit on their personal NJ income tax returns for any business taxes paid.  

The legislature was effectively trying to make this a wash from a NJ revenue standpoint, but let's be clear, this will raise significant revenue for New Jersey because the tax rates don't align perfectly with the income tax rates for either individuals or married couples.  

For example, under the new business tax law, there is a:
1) 5.525% tax on the distributive proceeds less than $250,000 (per owner);
2) 6.37% tax on distributive proceeds between $250,000 and $1M (per owner);
3) 8.97% tax on distributive proceeds between $1M and $3M (per owner); and
4) 10.75% tax on distributive proceeds over $3M.

For a single person, the NJ income tax rates are as follows:

NJ Tax Bracket - Single Person	NJ Tax Rate
$0.00 - $19,999	1.4%
$20,000.00 - $34,999	1.75%
$35,000.00 - $39,999	3.5%
$40,000.00 - $74,999	5.53%
$75,000.00 - $499,999	6.37%
$500,000.00 - $4,999,999	8.97%
$5,000,000 +	10.75%

For a married couple, the NJ income tax rates are as follows:

NJ Tax Bracket - Married Couple	NJ Tax Rate
$0 - $19,999	1.4%
$20,000 - $49,999	1.75%
$50,000 - $69,999	2.45%
$70,000 - $79,999	3.5%
$80,000 - $149,999	5.53%
$150,000 - $499,999	6.37%
$500,000 - $4,999,999	8.97%
$5,000,000.00 +	10.75%

However, if this new law goes into effect, it will be a significant net savings for NJ business owners because they will not be as badly impacted by the new federal law.   Remember, the Tax Cuts and Jobs Act signed by President Trump stated that State income taxes and local property taxes are capped at $10,000 per year.  The reason that NJ business owners will not be adversely affected by this new (and usually higher) business tax is that NJ is converting a non-deductible state income tax (from your personal return) into a deductible business expense.

Let's run through an example.  Let's say that Joanne owns a nearby estate planning law firm structured as a limited liability company.  Joanne's net income after all expenses (except state income taxes) is $150,000.  (For purposes of this example, let's assume that she is single and has no other income and is not entitled to any other deductions other than a $10,000 property tax deduction for her primary residence.)  

If the New Jersey Pass-Through Business Alternative Income Tax Act does not come into law, then she would have a state income tax liability of approximately $7,365 and a federal income tax liability of $19,533 (after factoring in the 199A deduction of 20% and the $10,000 property tax deduction).  Total tax liability of approximately $26,898.  Joanne does not get to deduct the $7,365 from her federal income taxes.

If the New Jersey Pass-Through Business Alternative Income Tax Act does come into law, then there would be a NJ business tax of $7,875, no NJ personal income tax, and a federal income tax liability of approximately $18,118 after reducing the $150,000 of income by $7,875 and then factoring in the 20% 199A deduction.  Total tax liability of $25,993.  

As you can see, the big difference is that the $7,875 should be considered a deductible business expense for purposes of the federal tax law.  So even though there is an additional $510 of NJ state taxes, there is $1415 less of federal income taxes, for a total savings of $905.  

If and when the NJ law actually passes, I will provide another update.

* Note - all calculations for taxes done using free software with minimal assumptions, so please do not rely on them.  I am just trying to illustrate how the new tax law should work in theory.

What is the first thing an executor of a Will should do?

I am happy to announce that we have finally finished creating a series of short videos regarding the estate planning and estate administration process.  Here is our second video in which Elizabeth Ketterson, Esq., the Director of our estate administration department, is being interviewed by Kevin A. Pollock, Esq., LL.M. regarding the first things a person who is in charge of an estate should do.

If the person is named under a Will, that person is known as the executor.  If there is no Will, that person can apply to the court to be appointed as an administrator of the estate.

We recommend that you meet with an attorney that your are comfortable with to help you prepare the paperwork necessary to be appointed as Executor or Administrator.  The Court will then give you the necessary paperwork to speak with banks, set up an account, and make any claim for funds owed to the estate.  Once you have started collecting assets, then you can arrange to pay the estate's bills.

We strongly recommend that you do NOT distribute money to any beneficiaries until all the bills have been paid and you have received a waiver or release from the beneficiaries stating that they approve of your actions as executor.

To learn more about estate administration or hiring a probate Attorney, please visit us at: https://pollockfirm.com/estate-administration-2/

Why Repeal of the NJ Estate Tax Means Married Couples Should Update Their Wills

Effective January 1, 2018, New Jersey repealed its estate tax.  The question then become how does this affect you and do you need to do anything about it?  For most people the change is a positive one because it means their heirs pay less taxes and they do not need to do anything to update their documents.

Generally, You are Unaffected by the Repeal of the NJ Estate Tax If...

1. You do not have children and plan on leaving money to siblings, nieces, nephews, friends or charity.
2. You are NOT married but have surviving descendants.
3. You are married couples with children and you plan to leave everything outright to your surviving spouse on the first to die.

In all three situations above, the repeal of the New Jersey estate tax should not affect you and you generally will not need to update your Will or Revocable Living Trust.*  In the first situation, if you are leaving money to siblings, nieces, nephews and friend, be aware that NJ did NOT repeal its inheritance tax, so you still are affected by that.

For married couples who have a Disclaimer Trust plan, your documents are also generally unaffected.

Repeal of the NJ Estate Tax Can Dramatically Affect Married Couples Who Set up a Trust for the Surviving Spouse

To understand why the repeal of the New Jersey Estate Tax can adversely affect married couples who set up a trust for the surviving spouse, I will take a step back to discuss why we often recommend a trust be created for a surviving spouse.

Reasons to Create a Trust for a Surviving Spouse

1. The first spouse to die wants to ensure that if the surviving spouse gets remarried, the children are protected from future spouse and still receive an inheritance.
2. You have children from a previous relationship and want to ensure that upon the death of your spouse, your children receive whatever is left over.
3. The surviving spouse isn't good with money and needs assistance managing the wealth.
4. Estate Tax Efficiency - Prior to 2017, New Jersey had a ‘use it or lose it’ state estate tax exemption of $675,000.  

Why Was It Tax Efficient to Create a Trust for a Surviving Spouse

Protecting money for the benefit of the your children or from a spendthrift spouse are still very valid reasons to set up a trust, so I will spend the rest of the article talking about how trusts for a surviving spouse in older Wills and Revocable Trusts are usually no longer tax efficient.  

Let's presume it's 2016 and we have a married couple with $1,350,000 of assets.  One spouse dies leaving everything to survivor outright.  The surviving spouse then dies shortly after leaving everything to the children.  In this scenario, we would lose the NJ estate tax exemption of the first spouse to die and the children would only benefit from the $675,000 NJ estate tax exemption of the Surviving Spouse.  Assuming no growth in assets, the children inherit the full $1.35M, but $675,000 would be subject to a tax of almost $55,000.

To minimize the NJ estate tax, attorneys would advise clients to set up a trust for the surviving spouse instead of having funds go outright.  So, in the example above, when one spouse dies, he could leave everything to a trust for the survivor.  The surviving spouse then dies shortly after leaving everything to the children.  In this scenario, by funding a trust for the surviving spouse, we are utilizing each spouse's NJ estate tax exemption.  Upon the death of the surviving spouse, children would receive $675,000 from the trust tax free and the other $675,000 from the surviving spouse tax free.  This type of planning could easily save $55,000 in NJ estate taxes.

Funding a Trust for the Surviving Spouse May Be Tax Inefficient after the Repeal of the NJ Estate Tax.

Now that you know why it was advisable to set up a trust for a spouse and why it was tax efficient, you need to know why most older trusts should be amended.  Basically, now we can make it even MORE tax efficient.  This time, however, we are not talking about estate tax efficiency - now we are trying to make the trusts more efficient for income tax and capital gains tax purposes.  Let me give you two examples again:

Let's presume it's 2010 and we have a married couple with $1,350,000 of assets.  Dad dies leaving everything to Mom.  Mom lives another 20 years before dying and leaving everything to the children.  Since Mom lived another 20 years, let's presume the assets grew by $1M and were now worth $2,350,000. We do not have to worry about the NJ estate tax anymore, so the assets would go to the children completely free tax.  Additionally, when the children receive their inheritance, it is eligible for a step-up in basis.  This means that the children can effectively sell their inheritance the day after Mom dies and pay no capital gains tax on the $1M+ of appreciation.  (Please read this post to better understanding basis.)  

Now, let's presume the same facts as above except that when Dad died, he left $675,000 to Mom in trust.  Let's also presume that the trust received the benefit of all the appreciation, so that when Mom died, she had $675,000 in her own name and $1,675,000 in trust.  The children would still receive a step-up in basis from the $675,000 in assets that came from Mom, but the basis in the trust fund assets would only be $675,000 (the value on Dad's date of death).  So when the children sold the assets that were in the trust, there would be a capital gains tax (up to 23%) on the $1M.  

Most older Wills and Revocable Trusts used this formula for a trust for a surviving spouse, so hopefully it is easy to see why it is no longer tax efficient to continue using it.

Do I Need to Update My Estate Planning Documents?

If you have a Will or Trust created prior to 2017 leaving money in trust to a surviving spouse, the short answer is probably yes.  The one major exception to this is if you have a Disclaimer Trust plan.  If money goes outright to the surviving spouse, and the survivor has to make an affirmative election to fund a trust, then the plan most likely is fine the way it is written.

How You Can Fix Your Older Trusts

If you have an estate plan that automatically leaves money in trust for the surviving spouse, there are two easy ways you can fix it so that it is more tax efficient. 

1. Option one is to get rid of the trust for the surviving spouse and leave everything to the survivor outright.  This is an easy solution when the estate isn't very large or complex.  However if you are in a second marriage situation or if you are concerned about the surviving spouse getting remarried or spending away the children's inheritance, then you should consider the second option.
2. Option two is to revise the formulas in the Will or Trust so that it gets a step-up in basis when the surviving spouse dies.  (There are hundreds of ways to do this which are far beyond the scope of this post.)

To further complicate things, most tax attorneys like me will also build in a fail-safe so that if the NJ estate tax comes back, we can have the option of funding an old-style trust.

Conclusion 

If you have an older Will or trust that leaves money to a surviving spouse in trust - have it looked at.

* Regardless of whether you have a trust for a surviving spouse, always have your own estate planning documents reviewed by your attorney just to be sure it matches your wishes and still complies with state law.  The purpose of this blog post is to discuss who is most likely to be affected by the repeal of the New Jersey estate tax.

What is a Disclaimer Trust?

A Disclaimer Trust is a special type of trust often created under a Will (or as a sub-trust of a revocable living trust) that generally allows a person to refuse an asset and still benefit from it under a trust.  In order to understand Disclaimer Trusts, you first need to understand what a disclaimer is and what happens when you make a disclaimer so that you can understand the purpose and mechanics of Disclaimer Trusts.

What is a Disclaimer?

A disclaimer is literally when someone refuses to accept money or an inheritance.  A person can disclaim a gift, an inheritance, an interest in a trust, or certain powers.  (Let's call this the "Disclaimed Interest".) A person can also make a partial disclaimer, such as disclaiming half of their inheritance (although special rules apply to this).

What Happens When a Disclaimer Is Made?

When a Disclaimer is done correctly, it has the affect of treating the person who disclaims as if he or she died prior to the Disclaimed Interest being made.  So, if a Wife is disclaiming an inheritance from her Husband, it treats the Wife as if she had died before the Husband for whatever amount Wife disclaims.  Generally, in order for a disclaimer to be effective for tax purposes, it must be done within nine months from the date of death AND the beneficiary cannot have accepted the Disclaimed Interest.

Since the Disclaiming party is treated as if he or she died before the gift or bequest was made, the Disclaimed Interest will pass to the next person in line who is suppose to receive that.  For example, if a Will says, everything to my spouse, and upon the death of my spouse, it all goes to my children, then if the surviving spouse disclaims her inheritance, it would all go to the children.  However, that may not be the result the surviving spouse wants.  She might want to have access to that money during her lifetime and only have it go to the children upon her death.

What is the Purpose of a Disclaimer Trust?

The purpose of a Disclaimer Trust is that it allows a surviving spouse to inherit money, but to do so in a way that would be more tax efficient for the descendants of the person creating the Will.

This tax efficiency is probably best illustrated by two examples of how it affected NJ residents prior to 2017.  Back when NJ had a state estate tax, it often wasn't beneficial for the surviving spouse to inherit everything outright. New Jersey had a 'use it or lose it' state estate tax exemption of $675,000.  So, if a married couple owned $1,350,000 of assets, and when one spouse dies they wish everything to go for the benefit of the survivor and then down to the children:

1. Example 1 - Upon the first to die, everything goes to surviving spouse outright.  When the second spouse dies, she would only have one NJ estate tax exemption of $675,000.  So assuming no growth in assets, the remaining $675,000 would have been subject to the NJ estate tax, resulting in a tax of almost $55,000.
2. Example 2 - Upon the first to die, everything goes into trust for the surviving spouse.  This utilized the estate tax exemption of the first person to die.  The surviving spouse still had access to the funds in trust, but when she died and everything went to the children, there was no NJ estate tax because she also had an estate tax exemption.

Under What Circumstances Should a Surviving Spouse Disclaim Assets into a Disclaimer Trust?

A surviving spouse should disclaim an inheritance into a Disclaimer Trust when it would be tax efficient to do so.  If we go back to our example above, let's say the couple with $1,350,000 has their estate dwindle down to $500,000, or they move to another estate without a state estate tax, or the estate tax exemption has increased well beyond what they expect to have when the surviving spouse dies, there would be no point in the surviving spouse disclaiming. 

If it is highly like that the surviving spouse will live in a state that has a state estate tax, and it the surviving spouses assets (including the inheritance) would be above that state's estate tax thresh-hold, then it often beneficial for the surviving spouse to disclaim the assets into a Disclaimer Trust.

(Incidentally, before the federal government had portability between spouses of the federal estate tax exemption, this was a part of practically every single Will for married couples.  Since portability and the increase the federal estate tax thresh-holds, fewer attorneys are including these clauses unless the state has an estate tax.)

When Should a Surviving Spouse Disclaim Assets into a Disclaimer Trust?

For a disclaimer to be effective for tax purposes, it must be done within nine months from the date of death.  The nice thing about Disclaimer Trust planning for couples is that it allows the surviving spouse to take a look at all the facts and circumstances when the first spouse dies.  

It is important to remember that the funding of a Disclaimer Trust is always optional.  A disclaimer Trust will NOT get funded unless the surviving spouse makes files a qualified disclaimer according to local state rules.  You can analyze your wealth situation, need for cash, look at the tax laws and figure out what is best for your situation.

What are the Tax Consequences of a Disclaimer?

If a Surviving Spouse disclaims within the nine period and does so according the rules set out by the IRS (basically not taking the property first, not directing where the disclaimed property goes, and complying with state rules on disclaimers), then the disclaimed amount will be includible in the decedent's taxable estate.  This is generally what you want as you are disclaiming to utilize the decedent's estate tax exemption amount.

The person disclaiming must be careful not to disclaim too much, otherwise that might trigger an estate tax on the first to die.

It should be noted that failing to disclaim in a timely fashion or in a way proscribed by the IRS will result in the disclaimer be treated as a taxable gift by the Disclaimant.  Basically, it's as if the surviving spouse accepted the property and then gifted it away.

Alternatives to a Disclaimer Trust Plan

The question I always ask my clients is whether or not they want to guarantee that money go into trust for the surviving spouse.  If they want to guarantee the use of an estate tax exemption or if they want to protect the money from a future spouse, we wouldn't do a Disclaimer Trust plan, we would just automatically fund a trust for the benefit of the surviving spouse upon the death of the first spouse instead of giving the surviving spouse the option to fund it upon the first to die.

However, many people aren't concerned about the surviving spouse remarrying, and they want to keep things simple.  Usually in those cases, we would allow the surviving spouse to disclaim their inheritance into a Disclaimer Trust upon the first to die if there is a tax reason to do so.

If the surviving spouse really doesn't need the money, he or she can also take the money and gift it to the children (or wherever you wish). Remember, this can result in a taxable gift.  However, with the high estate and gift tax exemption limits ($11.2M per person in 2018), most people will not actually incur a gift tax unless you make a very large gift.

Who Can Make a Disclaimer?

Throughout this post I have talked about the ability of a Surviving Spouse to make a disclaimer, and while anyone can disclaim an asset, only a Surviving Spouse can disclaim an asset in to a trust for the benefit of himself or herself.  The general rule for anyone other than a surviving spouse is that you cannot disclaim money and still benefit from it.  Accordingly, your child can never disclaim into a trust for his or her benefit.  

On the other hand, attorneys frequently create estate plans that give money to child, but if child dies, her share goes to grandchild in trust.  If the child is wealthy, she might not want or need the money and then Child can disclaim funds into grandchild's trust and act as trustee of that trust.

Problems With Disclaimer Trust Planning

The biggest problem with Disclaimer Trust planning is that the surviving spouse often fails to make an effective disclaimer.  If the surviving spouse doesn't seek counsel within nine months of the first spouse's date of death, or they transfer money into their own name, then an effective disclaimer cannot be made.

Balancing Estate Tax Planning and Capital Gains Tax Planning

One of the trickiest aspects of deciding whether or not to do a disclaimer is calculating whether a disclaimer will minimize overall taxes and expenses.  If the assets are in the surviving spouse's name, it can be subject to extra estate taxes.  If the assets are titled in the name of a Disclaimer Trust, it could produce additional capital gains taxes, accounting fees and other costs.  I would strongly urge you to consult with a tax attorney before exercising a disclaimer.

How Do I Know if My Estate Plan Includes a Disclaimer Trust?

The Will or Revocable Trust usually says something to the effect of "I leave everything to my spouse, but if my spouse disclaims all or a part of his or her inheritance, such disclaimed portion will be distributed pursuant to the Disclaimer Trust created hereunder."

A surviving spouse should be careful of disclaiming if no Disclaimer Trust is established under the Will or Revocable Living Trust as a disclaimer could have the effect of sending everything to the children.

If a Disclaimer Trust is Primarily for Married Couples Living in a State That Has a State Estate Tax, Why Do My Documents Have a Disclaimer Trust?

Disclaimer Trust planning is most useful in states still have a state estate tax.  However, many attorneys will automatically put it in the estate planning documents for a married couple even if they live in a state that doesn't have a state estate tax just in case the client moves to a jurisdiction that does have the tax.  Moreover, it was common practice to do Disclaimer Trust planning prior to 2001 when the federal government allowed spouses to port their unused federal estate tax exemption to the surviving spouse.  Accordingly, there is a historical component to this in all states.

Is there Any Harm to Having a Disclaimer Trust in my Will or Revocable Trust Even Though I Know I Will Never Use It?

Attorneys never like to use the word "never".  So, I will say that it would be very surprising if there is any harm in having a Disclaimer Trust in your Will or other estate planning documents.  It is a great failsafe.

Benefit of a Life Insurance Trust after the Repeal of NJ Estate Tax

As we get closer to the repeal of the New Jersey Estate Tax on January 1, 2018, it is important to remember that New Jersey has NOT gotten rid of its inheritance tax.  Accordingly, if you wish to leave money to brothers, sisters, nieces, nephews, friends or a significant other (besides a spouse) and if you have life insurance, you should explore whether a trust is a good option.

Here's generally how the NJ Inheritance Tax works.  There is no inheritance tax on money going to charities or Class A Beneficiaries.  Class A Beneficiaries include: 

1. A spouse (or civil union partner or a registered domestic partner);
2. Lineal ascendants (parents, grandparents, etc.);
3. Lineal descendants (children, grandchildren, great-grandchildren, etc.) and
4. Step-children (but not step-grandchildren)

New Jersey excludes a number of items from the inheritance tax.  Specifically, the major items are excluded from the NJ Inheritance Tax are:

1. Real estate or real property owned outside of NJ (Note that if you own a co-op, you technically do not own real estate, you own stock, which is intangible asset that is subject to the NJ inheritance tax.); 
2. Money recovered under the NJ Death Act (as compensation for wrongful death); and
3. Life insurance that is payable to anyone except to a person's estate.

As you can see, when it comes to life insurance, if you ultimately want money going to brothers, sisters, nieces, nephews, friends or a significant other, you don't want to name your estate as the beneficiary (even if it filters through a Will) because it results in a NJ inheritance tax.

Now, the easy and obvious solution in most cases is that you can simply fill out a beneficiary designation form for the life insurance policy and name the people that you want, and then the death payout will be excluded from the NJ Inheritance Tax.  However, many people want to create more complex arrangements.  Here are some situations in which it is likely worth the time and expense to set up a trust:

1. If you want to set money aside for the benefit of an elderly parent or special needs relative, but upon their death, want the balance to go to other people.
2. If you want to have a complex formula for who gets your assets.  (For example: If Person A and B are alive, they get 30% each and person C gets 40%, but if A or B is not alive, then person C gets their share.)
3. If you don't want to let the beneficiary of your policy have immediate access to the money upon your death.  Let's say you want to leave money to a niece or nephew, but they are a minor, so you want them to have money for college, but not play money until later in life.  A trust is especially good here if you don't trust your sibling to manage the money.
4. If you have multiple policies and many beneficiaries, you may not want to update all the policies every time you change your mind regarding who the beneficiaries should be.  If you name the trust as beneficiary, you can just change the trust and you won't need to redo beneficiary designation forms at multiple institutions.
5. If you want to name certain people as beneficiaries, but you don't want them to know.  (Keep in mind that some insurance companies ask for Social Security Numbers of the beneficiaries and you may not want to ask people for that, or they may want to know why.  With a trust, you don't even need to have that conversation.)
6. In divorce settings.  Let's say you are obligated to pay life insurance to a ex-spouse, for a certain period of time, or based upon a formula.  You can name the trust as the beneficiary, and put the formula in the trust.  The alternative is revising your policy each year.

Remember, in many of the scenarios above, you can simply create a Will that sets up a trust, but if you name the estate as the beneficiary, it causes the inheritance tax.  If you set up the trust before you die, and name the trust, it won't cause an inheritance tax.  It is also very important to realize that if you are only worried about avoiding the NJ inheritance tax, it does NOT have to be a traditional irrevocable life insurance trust.  This means that if you even have a traditional revocable trust and name that as the beneficiary of your policy, it avoids the NJ inheritance tax.

Can the Trustee of a New Jersey Special Needs Trust Buy Clothing?

Although the federal government clearly changed the rules in 2005 to allow a Trustee of a First Party Special Needs Trust to buy an unlimited amount of clothing for person receiving Medicaid and SSI, there is still a lot of confusion regarding this issue in New Jersey.

New Jersey Administrative Code Section 10:71-4.11, which was enacted in 2001, states that if a Trustee of a Special Needs Trust purchases clothing for someone who has qualified for Medicaid or SSI, it will be considered income to the beneficiary and could reduce the beneficiary's government benefits.  Moreover, if the trust allowed distribution for purchase of clothing, it had the possibility of having the entire trust counted as an asset that may disqualify the beneficiary from benefits.  THIS IS OLD LAW.

To quote from the new law, POMS S.I. 01130.430: "A change in the regulations, effective March 9, 2005, establishes that the resource exclusion for household goods and personal effects no longer has a dollar limit. As a result, beginning with resource determinations for April 2005, SSA no longer counts household goods and personal effects as resources to decide a person’s eligibility to receive Supplemental Security Income (SSI) benefits."  The 2005 law goes on to define "personal effects" to include clothing.

There are several reasons why things are still so confusing:

1. New Jersey has not updated the Administrative Code to reflect the change of law on the federal level by POMS S.I. 01130.430.  The Social Security Regulations clearly override any state rules with respect to eligibility for Medicaid and SSI benefits.  So when Social Security updated its rules in 2005, the NJ rules were automatically updated as well.
2. When looking up the NJ rule online, there is a lot of bad, old information on many websites.
3. When looking up the NJ Administrative Code, which is free on Lexis-Nexis (thank you by the way), unfortunately it has the most recent year next to the Code.  That has the unfortunate side effect of making it look like a new and current law, even if it is not.

So, to be clear - a Trustee of a Special Needs Trust (regardless if it is a first party trust or a third party trust) can buy clothes for the beneficiary and not be concerned that such expenditures will be counted as income or that the beneficiary will lose his or her government benefits.  That being said, if you are spending an excessive amount on clothes, you should probably expect extra scrutiny from the government and potential problems because they could make the argument that the person is just taking the clothes back in exchange for cash, and the fight wouldn't be worth it.

Will the New Jersey Estate Tax Repeal Become Permanent?

As most of my estate planning clients are aware, I have been very cautious regarding whether or not New Jersey will keep a $2,000,000 estate tax exemption beyond 2017 or allow for a full repeal. However, it is worth noting that the front-runner for Governor, Phil Murphy, released part of his tax and spending plan today.  See this article on NJ.com: http://www.nj.com/politics/index.ssf/2017/08/murphy_tax_plan_would_raise_13_billion_heres_whod.html

As part of the plan, he stated that he has NO intentions of re-introducing the estate tax.  Accordingly, there is probably a good chance that the repeal of the NJ Estate Tax does become permanent.  Only time will tell though.

NJ Has Finally Released 2017 Estate Tax Return and Calculator

As I know many of you have been waiting anxiously, I wanted to make sure that you are aware that the New Jersey Division of Taxation has finally released the 2017 Estate Tax Return form.  They have also released an estate tax calculator so that we can accurately prepare the return.  The NJ 2017 Estate Tax Calculator can be downloaded from the NJ Department of Treasury website.

The New Jersey Estate Tax Calculator is important because the new estate tax law was crafted with a slight flaw in it because it has a circular calculation.  (This means the tax can't be calculated without reference to the tax, which in effect, changes the tax, over and over again.) For example, if you were to look at the statute, you may think that if you had an estate of $2,001,000, the estate would be taxed at 7.2% on the $1,000 that you were over the $2M threshhold.  This is not true.  According to the calculator, the tax is $66.82, not $72.  As the numbers get higher, this obviously becomes more important.

Anyway, the good news is that if you are an executor, administrator or involved in an estate of someone who passed away in 2017, you can now start the process of filing a New Jersey estate tax return.

Where Is The Best Place To Die From An Estate And Inheritance Tax Perspective?

Several years ago, I wrote a few articles comparing the tax consequences of dying in New Jersey, New York, Pennsylvania and Florida.  Now that New Jersey has amended its estate tax laws, I thought I should write another post for 2017.

I will write this blawg post with the following assumptions in mind:
1) Nothing is going to a surviving spouse (since no state taxes transfers to a surviving citizen spouse, this is generally not a factor).  Note, NJ still has an estate tax on transfers to a surviving NON-CITIZEN spouse if the transfer is for more than the state estate tax exemption amount, currently $2,000,000.
2) Nothing is going to anyone other than lineal descendants (children, grandchildren, etc.)  Transfers to nieces, nephews, friends, etc. can lead to a significant inheritance tax in New Jersey and Pennsylvania, so that is really a different comparison.
3) Since different states have different rules regarding what types of assets are taxable and where they are located, I will presume that all assets described herein are taxable by your state of domicile at the time of death.
4) The tax rates computed here are approximations only.  This is particularly true because New Jersey has a well known problem with its current estate tax that needs to be addressed.  (Basically, NJ's estate tax law contains a "circular" math calculation to figure out the tax.  We are still awaiting guidance from NJ on how to best do this or if they will issue a correction making the math easier and more straightforward.)

FLORIDA
Let's start off with the easiest of the four states, Florida.  Florida does not have an estate tax. Simply put, you do not have to worry about a tax upon death.

PENNSYLVANIA
Pennsylvania has a FLAT 4.5% inheritance tax on all transfers to children and grandchildren.  There are some notable exemptions though.  In particular, Pennsylvania does NOT have an inheritance tax on:
1) life insurance;
2) real estate or business interests owned outside of Pennsylvania;
3) a "qualified family owned business interest" - defined as having fewer than 50 full-time equivalent employees, a net book value of assets less than $5 million dollars, and being in existence for at least five years at the decedent's date of death. In addition, the principal purpose of the business must not be the management of investments or income-producing assets of the entity.  Here is a short post I wrote about the inheritance taxation of small businesses in PA;
4) Most family farms; and
5) certain IRAs, 401(k) plans and 403(b) plans.  Generally, if the decedent is under 59.5 years of age and not disabled, it won't be subject to a PA inheritance tax.  The decedent must have the right to terminate or withdraw the money without penalty to avoid the PA inheritance tax.

Additionally, Pennsylvania only taxes a portion of money held in joint account with another if it has been titled in joint name for more than 1 year.

NEW YORK
New York has slowly been raising its estate tax exemption up towards the federal estate tax exemption limit.  However, NY never makes anything too easy.  For individuals dying between 4/1/16 and 3/31/17, the exemption amount is $4,187,500 and for individuals dying between 4/1/17 and 12/31/18, the exemption amount is $5,250,000.  Additionally, while NY exempts real estate located outside the state of New York from its estate tax, it also forbids deductions related to such property, which occasionally has the effect of taxing a portion of the property!

The worst part of New York's estate tax regime is that it has a substantial cliff.  Basically, if your assets are 5% higher than the exemption amount, YOU DO NOT QUALIFY FOR THE EXEMPTION!  So, currently if your estate is above $5,512,500, your pay a full tax on everything, and if you are between $5,250,000 and $5,512,500, you only receive a partial estate tax exemption.

The tax rates in New York range from 3.06% to 16% once you have over $10,100,000 of assets.

NEW JERSEY
As stated above, because of the technical problem with NJ's statute, I my calculations are based upon the assumption that New Jersey will offer a true dollar for dollar credit for its $2,000,000 exemption in 2017 (on the first $2M of assets in the name of the decedent, not the last $2M).

Moreover, it should be noted that NJ has the fewest items that it excludes from its estate tax.  It doesn't include out of state real property or business interests fully, but it does do so on a proportionate level, effectively taxing some of it once you are above the exemption amount.

New Jersey DOES have an estate tax on life insurance if you owned the policy on your own life, unless paid to a citizen spouse or charity.

New Jersey's tax rates will be 7.2% to 16% depending upon how far above the $2,000,000 exemption amount you are.

SO JUST GIVE ME THE ANSWER, WHERE IS THE LEAST EXPENSIVE PLACE TO DIE?
It's still never that easy, except for Florida.  There is never a death tax in Florida, but let's compare:

NY estate tax vs. NJ estate tax vs. FL
Starting April 1, 2017, between New Jersey, New York and Florida,  if you have assets of less than $2,000,000 and are leaving everything to your children, it does not matter.  There is no state estate tax.

If you have assets between $2,000,000 and $5,250,000, it is cheaper to die in New York and Florida as neither of those two has an estate tax.  At about $5,000,000, New Jersey will have an estate tax of close to $292,000.

As your estate approaches, $5,500,000, New York quickly becomes the most expensive place to die because of the tax cliff.

NY estate tax vs. PA inheritance tax 
Starting April 1, 2017, between Pennsylvania and New York,  if you have assets of less than $5,250,000 and are leaving everything to your children, New York is the clear winner as it does not have a death tax and Pennsylvania has a flat 4.5% tax from the first dollar.

As your estate approaches, $5,500,000, New York quickly becomes a much more expensive place to die because of the tax cliff and because the rate is so much higher.

NJ estate tax vs. PA inheritance tax 
Starting January 1, 2017, between Pennsylvania and New Jersey,  if you have assets of less than $2,000,000 and are leaving everything to your children, New Jersey is the clear winner as it does not have a death tax and Pennsylvania has a flat 4.5% tax from the first dollar.

As your estate approaches, $4,000,000, New Jersey quickly becomes a much more expensive place to die because it has a higher tax rate.

Interestingly, the last time I made these calculations, for individuals dying before 2017, the cross-over point was $1,500,000.

RECOMMENDATIONS
As always, each client has a unique situation.  Many people who have assets in excess of $4,000,000 tend to own real estate in more than one jurisdiction, further complicating the tax picture.  Also just because you have a taxable estate now, it does not mean that you should move to avoid taxes upon your death.  It is usually possible to engage in tax planning to minimize any estate and inheritance taxes.  For instance, we can assist you with gift planning to minimize taxes upon your death.  Please contact us if you would like to learn more about how the changing laws affects you.

New Jersey Has Yet To Create An Estate Tax Return Form For People Dying In 2017

As many of you know, New Jersey recently revised its estate tax law.  Effective January 1, 2017, people who die in the year 2017 will have a New Jersey estate tax exemption of $2,000,000.  Since the law was enacted towards the end of 2016, the division of tax needs some time to prepare a new estate tax return form.

Unfortunately, if you are the executor or an administrator of an estate, and the estate is in excess of $2,000,000, you will not be able to file an estate tax return until the State of New Jersey provides guidance on the type of information they will need in order to issue Tax Waivers.  Inevitably, this will lead to a delay in getting access to funds.

If you are an executor trying to access funds from a financial institution, remember, the financial institution is required to release one-half of the funds.  We have heard a few horror stories recently about banks not doing this.  If this happens to you, please refer them to this notice from New Jersey. You will see in the section titled "Blanket waiver" that the bank may release 50% of the funds without a tax waiver.

Note, New Jersey has released Form L-8 and Form L-9 so that decedents who are leaving everything to Class A beneficiaries and charities and who have a taxable estate under $2,000,000 can access their accounts completely and apply for a tax waiver for any real estate owned.  (Thanks to the head of my estate administration department, Elizabeth Ketterson, for the reminder.)

This can be tricky when a decedent wants to give a token gift to a niece, nephew, godchild, step-grandchildren or friend.  Any bequest of more than $500 means that the Executor of the estate cannot use Form L-9 or L-8 to have more than 50% of the funds released as an inheritance tax will result and New Jersey will have an automatic lien on all New Jersey accounts and property.

New Jersey Estate Tax Deal

According to various news reports, it appears that New Jersey will officially be eliminating the estate tax.  The deal to eliminate the estate tax is part of a larger deal that increases the gas tax, reduces the sales tax slightly, gives the working poor a larger tax credit, gives a tax cut on retirement income and gives a tax exemption for veterans who have been honorably discharged.

The exact details are still murky, and as far as I am aware the final deal hasn't been published.  It is my belief that the estate tax exemption will increase from $675,000 to $2,000,000 effective January 1, 2017 and be phased out completely over the next few years.

I have not yet heard any reports regarding whether or not the NJ inheritance tax will also be eliminated.  As I learn more, I will pass it on.

Informative news articles can be found here and here.

Income Taxation of Trusts - Determining Which State Can Tax the Trust

Determining the situs of a trust (i.e. the residence of a trust) is not always an easy matter.  Each state has its own rules regarding whether a trust is a "Resident Trust", and often these rules are different from the tax rules, and in some states these rules have been challenged in Court as unconstitutional, where the taxpayer has prevailed, but yet the "unconstitutional rule" is still on the books.

This brings us to the wonderful worlds of New Jersey and Pennsylvania.  (Although I am sure a challenge is coming to New York soon.)

Let's take four different situations:
1) A NJ Resident Trust;
2) A Non-Resident NJ Trust;
3) A PA Resident Trust; and
4) A Non-Resident PA Trust.

In situation 1, a Trust is considered a NJ Resident Trust for state income tax purposes, and must file Form NJ-1041, if:
a) The Trust consists of property transferred by a NJ decedent via his/her Will;
b) If a NJ person gifts property to an irrevocable trust; or
c) If a NJ person owns assets in a revocable trust dies and now the trust is irrevocable.

It is important to note that an irrevocable trust is NOT considered a NJ Resident Trust if it was created in another jurisdiction even if all the trustees and beneficiaries are now NJ residents unless the trust situs is changed to New Jersey.

Moreover, even if the trust is considered a NJ Resident Trust, it is NOT subject to New Jersey income tax if:
a) It does not have any tangible assets in NJ;
b) It does not have any income from NJ sources; AND
c) It does not have any trustees who are NJ residents.

It is probably worth creating a separate post on what it means for a person to be domiciled in a particular state, but for now, let's say that it is clear that a person has fixed, permanent home in New Jersey.

All of the above can be gathered simply by looking at the instructions for NJ Form-1041.  However, what happens if the Trustees and beneficiaries move out of state?  Can NJ still tax the entire trust if only a portion of the income is attributable to NJ?  In 2013, the Tax Court of New Jersey decided in Residuary Trust A under the Will of Fred E. Kassner, Michele Kassner, Trustee v. Director, Division of Taxation, that New Jersey could not impose a tax on undistributed income generated by the trust simply because the Trust owned an S-Corporation created in New Jersey when the Decedent was a New Jersey domiciliary, but the Trustee was located outside of NJ and all of the other assets of the trust were located outside of NJ.

Specifically, the Court stated that the due process clause bars NJ from taxing undistributed income of a trust to the extent the trustee, assets and beneficiaries are outside of New Jersey, citing Pennoyer v. Taxation Division and Potter v. Taxation Division.

So, even if a trust is considered a NJ Resident Trust, it does NOT mean it will actually be subject to NJ income tax.

In situation 2, a Non-Resident NJ Trust, which can best be described as any trust that is not a NJ resident Trust, is only subject to NJ income tax to the extent the trust has income from NJ sources, such as a NJ business, real estate or gambling winnings.  (Although hopefully your trustee is not actually gambling!)

With respect to Situation 3, the rules for determining whether a Trust is a PA Resident Trust are almost identical to New Jersey.  However, where NJ had some clear exclusions whereby a trust was not subject to the NJ income tax, PA tries to tax all income if there was a resident trust.  This can be a big problem if you have a PA grantor of a Trust or a PA decedent where following the creation of the trust, the Trustees and the beneficiaries are all out of state.

Now, all is not lost as there was very recently an important case, McNeil vs. Commonwealth of Pennsylvania, in which the Court decided that Pennsylvania did NOT have the right to tax the income of a trust, which was created by a PA Grantor, when the trust was created in another jurisdiction, the Grantor had died, the Trustees where located outside of PA, and the only connection to PA where some discretionary beneficiaries that had not in fact received any income.

Pennsylvania seems to have acquiesced considerably in this decision.  While they still say "Resident Trusts" are subject to PA income tax and must file the PA Form 41, the instructions on that form, Pennsylvania allows a Resident Trust to be converted to a Non-Resident Trust by change the trust situs if it lacks sufficient nexus to PA.  It appears that the Trustees must follow certain steps to do this, but once done, the trust will no longer be subject to PA income tax.  (See page 3 of the form and 20 PA Code Section 7708.)

With respect to Situation 4, if there is a PA Non-Resident Trust (basically a trust that was not created by a PA resident), PA generally takes the position that the Trustee must only file a tax return in PA if the trust has PA source income or if there is a resident beneficiary.  The requirement to file the return when there is a resident beneficiary is new and particularly problematic because the requirement to file is true EVEN IF THE TRUST MAKES NO DISTRIBUTION TO THAT BENEFICIARY.

Importantly, the failure to file the PA-41 (Income tax return for a PA Trust) can trigger interest and penalties as high as 50%.
 

Is NJ finally going to repeal the Estate Tax and the Inheritance Tax?

I tend not to get too excited about any legislation until it is actually signed, but there is a fair amount of rumbling from both Republicans and Democrats about repealing the NJ Estate Tax.  The NJ Transportation Trust fund is running out of money, and Governor Christie has refused to sign any deal to increase the tax on gasoline without a corresponding tax cut somewhere else.

According to various sources, including this article on www.nj.com, lawmakers are close to finalizing a deal to raise the gas tax by $0.23/gallon in exchange for a 4-5 year phaseout both NJ's estate tax and inheritance tax.

Part of the proposed deal would also include a reduction on income tax on retirement money for people earning less than $100,000, an increase in the tax credit for the working poor and an increase in the deduction for charitable gifting.

It is important to note that they are trying to get a deal together by the end of the month to fund the Transportation Trust Fund.   Despite support from both Republican and Democratic senate members, a Chris Christie veto is expected (presumably because he does not think it cuts enough taxes)... that's why I'll believe a deal when I see it.

Estate Planning and Divorce in New Jersey

Men and women who are contemplating a separation or divorce have unique needs. Some divorces are very friendly and you can still count on your soon-to-be ex, but in most other situations, you may find that you rethink many aspects of your life, including where you wish your assets to go should something happen and who you can trust. 

Accordingly, it is essential to update your estate planning documents.  This should be done:

1. To ensure that someone trust-worthy will be able to make medical and financial decisions for you in the event that you are incapacitated; 
2. To prevent your soon-to-be-former spouse from receiving all of your assets; and 
3. To give you as much control as legally possible over how your children or any embryos created during infertility treatments will be taken care of and provided for in the event that you pass away.

The less trust-worthy your spouse is, the more important it will be that you take action to protect yourself (and your children). To help you get safely through this time of transition, you should consider creating:   

1. A Will. If you are married and die without a Will, your spouse would generally be entitled to 100% of your estate. However, if even if you are still married you are generally permitted to leave your assets to whomever you wish if you write a Will.  Most people think that your spouse may still be entitled to a third of your estate (the “elective share” under N.J.S.A. 3B:8-1), but the statute contains many exceptions which typically allow you to completely cut out your soon to be ex. This is because the elective share statute requires that at the time of death the decedent and the surviving spouse must not have been living separate and apart in different habitations, they must still been cohabiting as spouses and not under circumstances which would have given rise to a cause of action for divorce or nullity of marriage to a decedent prior to the decedent's death.
2. An Advance Directive for Health Care/Health Care Power of Attorney. This will allow you to control who will make medical decisions for you if you are unable to make them for yourself, helping to ensure that your wishes will be achieved. For example: would you want the person you are divorcing to be able to make decisions about your medical care and whether or not to remove life support, or would you want this decision to be made by a relative or close friend?
3. A Financial Power of Attorney. This will allow your agent to use your money to pay for your medical bills, attorney fees connected to your divorce, and potentially take action to do anything else needed for your benefit. Depending on how this document is structured, it can take effect as soon as you sign it, so that a trusted friend, relative, or financial services professional can help you through this stressful period. The divorce process is a stressful one and often brings with it a slew of new responsibilities and challenges. This document can allow you to outsource emotionally-difficult tasks such as selling your marital home and managing the transition of your assets from joint to separate accounts while you focus on making the big decisions, attending court, and adjust to life as a single parent. This document can also prove invaluable if symptoms of anxiety and depression (which can often be triggered by major life events) set in and you become unable to manage your affairs. Being proactive and creating a plan for dealing with your responsibilities can help make your daily life easier and more manageable during this difficult time. 

Speaking with an estate planning attorney can help you better understand your options and create the best possible plan when preparing for challenging circumstances.  

Written by: Jessica J. Sauer, Esq. & Kevin A. Pollock, Esq., LL.M. 

Reasons to Value a Trust

Recently I gave a lecture on the valuation of trusts.  While I am not an accountant nor am I a valuation expert, I live and breathe trusts... and frequently the question comes up, what is value of a particular beneficiary's interest in a trust.

Keep in mind, just because a trust is worth $1M, it does not mean that the beneficiary's interest is worth $1M if they have limited rights to invade the trust or control it.  Here's are a few reasons to value a trust:

1. When a person dies, that person may have a beneficial interest in a trust.  Depending upon the type of interest a person has, it may or may not be includible in his/her taxable estate.  If the interest is includible in the deceased beneficiary's taxable estate, then the executor of the deceased beneficiary must report it on federal and state estate tax returns. 
2. Similar to the above, but slightly different, when a person dies, he or she may leave a beneficial interest in a trust to another person.  Particularly in New Jersey and Pennsylvania, you see this come up a lot when a person leaves money to a class A beneficiary in trust (such as a spouse), and then the remainder interest to an non class A beneficiary (such as a nephew or niece).  This triggers something known as the Compromise tax.
3. Financial Aid - Some colleges and schools will look at the trust terms, others won't.  Each school is different regarding the questions they ask on their forms.
4. Divorce.  Depending upon the state, a person's interest may be subject to equitable distribution, alimony and especially child support.  

• New Jersey tends to be fairly friendly to a trust beneficiary.  See Tannen vs. Tannen, where the Appellate Court ruled that a beneficiary's income interest should not be imputed for purposes of alimony.  The general rule was already that such an interest was not subject to equitable distribution.  (NOTE:  This case law is likely to be challenged in light of the fact that NJ recently enacted the Uniform Trust Act. 
• Pennsylvania is far less friendly to trust beneficiaries.  The general rule in Pennsylvania is that marital property does not include trust property acquired by gift, bequest, devise or descent prior to or during the marriage, but it does include the increase in value of such property. See 23 Pa. Cons. Stat. 3501(a.1)   
• As far as I am aware, both Florida and New York follow the NJ rule and generally considers trust property as separate property, not subject to equitable distribution.  
• Massachusetts recently came down with a terrible case:  See Pfannenstiehl.   (Note: I'm not licensed in MA)

Regardless of the reason why you need to value a trust, the first step in determining the value is to figure out what type of interest that person has.  Usually a beneficiary's interest includes one or more of the following:

• An income stream
• The right to receive income or principal for health, education, maintenance and support
• An annuity stream (such as $2000/month)
• Principal distributions once the beneficiary reaches a certain age
• The right to take out $5000 or 5% per year
• A discretionary interest

Once you have figured out a person's interest in a trust, the next step usually involves hiring a certified appraiser to figure out the value of a person's interest. A trust attorney can assist the appraiser by advising them on the nuances of the trust and not-so-obvious options that a person may have in invading a trust.  

If you are the beneficiary of a large trust, I would recommend that you have the trust reviewed to see if you should disclaim and renounce certain powers to minimize taxes upon your death.  

New Jersey Enacts Uniform Trust Code into Law

While this may not sound like big news, it is actually very exciting that New Jersey has finally enacted the Uniform Trust Code (UTC) into law.  The new law will go into effect on July 17, 2016.  When it does, New Jersey will join Pennsylvania, Florida and a majority of other states in adopting most of the provisions of the UTC.

What does this mean for you though?  For the most part, if you have have a trust and have ever said to yourself, "The trustees and beneficiaries all agree this is outdated and certain provisions should be modified", this law is for you!

The best part about the UTC is that it makes it easier to modify a trust without going to court to have it amended.  There are obviously certain limitations, but simple things are much easier including:
1)  like moving the trust from one jurisdiction to another;
2)  interpreting confusing terms of a trust;
3)  approving the resignation of a trustee;
4)  appointing a new trustee; 
5)  granting or removing a trustee power; 
6)  determining trustee compensation; 
7)  approving an accounting; 
8)  terminating a trust (if not inconsistent with terms of trust); 
9)  reforming mistakes; and
10)  allowing a parent to bind minor children and unborn children if there is no conflict of interest.

Some other interesting provisions in the new law include:
1)  Even if a trust says that a beneficiary is not to be told about a trust, the Trustee must respond to the requests of certain beneficiaries and give them a copy of the trust document and other information related to the administration of the trust.
2)  It clarifies some of the terms of trusts for animals/pets.
3)  It clarifies the time-frame for a person to contest the validity of a trust.
4)  It clarifies to what extent and how a trustee can rely on financial advisers.

The new law, while effective starting on July 17, 2016, will apply to all trusts, whenever created.  This does not necessarily mean if you have a trust that you need to amend it.  However, some people may want to amend the trusts as soon as possible if:
1)  You really want to restrict your heirs from having the ability to modify the trust; or
2)  You have a split interest charitable trust based in New Jersey (although it is unclear if the charity or the Attorney General of NJ will consent to this); or
3)  You know that the trust document has a mistake and you'd rather try to convince the people alive now to fix it than wait for the next generation.

Update to Executor's Commissions in NJ

Back in March of 2014, I wrote a lengthy post about how to Calculate an Executor's Commissions in New Jersey.  Frankly, most of the executors I work with don't want a commission.  However, I recently came across an interesting situation where an executor wanted a commission and the decedent had substantial joint survivorship accounts with the executor.

Normally, a survivorship account is not subject to an executor's commission on the theory that the executor doesn't have to do any work with respect to those accounts.  In this situation though, the survivorship accounts were actually convenience accounts.  A convenience account is a type of account that goes to the surviving account holder, primarily to pay bills, but based upon the intent of those involved, the balance of the funds will be disposed of with the rest of the Decedent's estate.  In other words, the money does not legally belong to the surviving joint account holder, it belongs to the estate of the Decedent.

In my situation, even though the money passed to the executor, in his individual capacity, on the death of the decedent, the money will ultimately be processed through the estate's accounts and go to the beneficiaries under the Decedent's Will. Accordingly, the executor CAN take a commission on these joint accounts.  More importantly, this commission is tax deductible for purposes of calculating the New Jersey estate tax.

I had trouble finding legal authority for this position, so I called up the New Jersey Division of Tax, Estate and Inheritance Department, and they confirmed this result.

Calculating Trustee Commissions in NJ

From time to time, people ask me how executor's commissions and trustee's commissions should be calculated.  I have already written a post on calculating executor and administrator commissions, so this post will focus on Trustee commissions.

New Jersey statutes on trustee commissions are very difficult to interpret because they use the term fiduciary to apply to executors, administrators, trustees, guardians and conservators.  This would not be a problem if the fees were calculated the same, but they are not.  Additionally, there are different rules for testamentary trusts (trusts created under a Will) and intervivos trusts (a trust created while the Grantor was alive).  Going forward, if a particular rule applies to everyone, I will call that person a fiduciary.

To start, the Grantor of a Trust can specifically provide for a trustee commission.  However, for testamentary trusts, if the commission is higher than the amount allowed under the New Jersey statutes, the Will must specifically state that the testator is aware of the commissions allowed under the New Jersey statutes and expressly authorize payment in excess thereof.  N.J.S.A. 3B: 18-31.

Failure to expressly authorize a commission in excess of the NJ statutory limit or failure to state whether or not a trustee is even entitled to commission will result in the trustee being able to take a fee as provided in New Jersey Statutes 3B:18-23 through 3B:18-29.  These statutes also apply to Guardians and Conservators.

So how is the trustee's fee actually calculated?

Unlike an executor who typically takes a one time fee, Trustees are more likely to take annual commissions, especially if the trust goes on for a long time.

The fee is comprised of both an income commission and a corpus commission.  A trustee is entitled to annual income commissions of 6% without prior court approval. N.J.S.A. 3B: 18-24.

The corpus commission is a bit more complicated to calculate:. Normally an executor will take a one time commission as follows:

1. 0.5% on the first $400,000 of all corpus received by the executor; plus
2. 0.3% on the excess over $400,000.  (N.J.S.A. 3B: 18-25)

If there is more than one trustee, an additional 1/5 of all the commissions allowed above is authorized, provided that no one trustee shall be entitled to any greater commission than that which would be allowed if there were but one trustee involved.   (N.J.S.A. 3B:18-25.1)

A trustee is entitled to a minimum fee of at least $100 per year and corporate trustees may set their own rates.

Upon the termination of a trust, the trustee is entitled to a termination fee in addition to the annual fees he or she may have taken.  3B:18-28.  The termination commission is as follows:

1. If the distribution of corpus occurs within 5 years of the date when the corpus is received by the fiduciary, an amount equal to the annual commissions on corpus authorized pursuant to N.J.S. 3B:18-25, but not actually taken by the fiduciary, plus an amount equal to 2% of the value of the corpus distributed
2. If distribution of the corpus occurs between 5 and 10 years of the date when the corpus is received by the fiduciary, an amount equal to the annual commissions on corpus authorized pursuant to N.J.S. 3B:18-25, but not actually received by the fiduciary, plus an amount equal to 1 1/2 % of the value of the corpus distributed;
3. If the distribution of corpus occurs more than 10 years after the date the corpus is received by the fiduciary, an amount equal to the annual commissions on corpus authorized pursuant to N.J.S. 3B:18-25, but not actually received by the fiduciary, plus an amount equal to 1% of the value of the corpus distributed; and
4.  If there are two or more fiduciaries, their corpus commissions shall be the same as for a single fiduciary plus an additional amount of one-fifth of the commissions for each additional fiduciary.

An illustration of how to calculate the annual trustee commission

Let's presume the following facts:  Trust owns a house worth $500,000, a $1,400,000 in stocks and bonds, and $100,000 worth of cash. This is the value at the end of the previous year.

Let's also presume that there is only one trustee and in the year in question the stocks and bonds gave off $56,000 of income. 

Accordingly, the calculation would be as follows:

0.5% on the first $400,000 would be $2,000
0.3% on the next $1,600,000 would be $4,800
6% on the $56,000 of income would be $3,360
So the trustee would be entitled to a total commission of $10,160 for the previous year.

Final thoughts about trustee's commissions

Any commission that a trustee takes will be subject to an income tax.  As a result, if the trustee is also a beneficiary, he or she may not want to take a commission.  Additionally, many times relatives do not appreciate the amount of work involved and will become upset at a trustee if he or she takes a commission. You should think about the dynamics of your family before taking one.

A trustee that does extraordinary work can apply to the court for a commission in excess of the statutory fee.  A trustee needs to prepare an annual accounting, and one that fails to adequately communicate with the beneficiary or otherwise behaves badly can be removed by the court.  If a trustee is removed from office, he or she may be required by a judge to forfeit his commissions.  This is not automatic though.

Finally, as discussed in back in May of 2013, an attorney who is serving as a trustee may be entitled to a fee for legal services AND a commission.